Satyam Scandal: India's Claim to Ponzi Fame

The ice is broken. The chairman of a company that was considered one of the torchbearers of India’s new economy has confessed to one of the country’s biggest corporate frauds. Satyam (SAY) is the company and Ramalinga Raju the chairman, who has now resigned from his post following the revelation of a fraud that might even give scamsters like Bernand Madoff and Charles Ponzi a run for their money.

Satyam’s gaffe last month of transferring funds to promoter group companies by buying stakes in the latter already raised a stink. It led us to doubt the faith that investors had put in the company’s management, its independent directors, auditors, consultants and rating agencies. Simply put, it shook the entire chain of belief that investors had on these parties.

Mr. Raju's confession has put the nail in the coffin. What is even more glaring is his statement saying that that Rs 50 bn (or 94% of total) cash on Satyam’s books is non-existent, fake!

In his confession statement, Mr. Raju says – “Every attempt to eliminate the (balance sheet) gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.”

Well, Mr. Raju still survives after getting off this tiger! Every other investor has been eaten. And so have the 50,000 employees of the company who must be wondering where they have been brought into. After all, employment with Satyam might not anymore be an added advantage on their CVs.

He has also admitted that the Maytas deal was “the last attempt to fill the fictitious assets with real ones.” He goes on to say, “Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed.”

This man has put the whole India growth story at risk by indulging in this fraud. And he is not alone in this. This also brings to light the loopholes in the evaluation systems that boards, auditors, credit rating agencies and bankers apply to judge companies. The role of companies must be to find creative and productive ways to help build societies of confident and independent investors and citizens. Frauds like Satyam and its chairman is definitely not what we want.

We are holding back our view on Satyam until further clarity regarding its future emerges.

Comments

[abcde_98:]

What about Europe's claim to the Ponzi scheme: a fiat currency called the Euro ! The EU keeps bringing in new countries to the Euro, and those countries have developing/faster growth economies. What if the EU had not brought in the central and eatern european countries?

The economies of the older / mature / original EU countries are not in such great shape. Why not bring in younger / fast growth economies to mask the effects.

Jan 07 09:20 AM

[mkreisel:]

India's legal system is a lot better than China's.

Now that one of the major Indian companies is hit with something like that, what can people conclude about Chinese companies, or Russian ones?

Jan 07 02:46 PM

[Sekar:]

Ramalinga Raju was spinning cotton in 1992 when I owned Satyam Spinning Mills shares. Raju's crude luck brought him into IT area without any strong foundation. Raju leapfrogged TCS and Wipro (by the way was selling Hair oil and assemblying PCs) in 10 years using dubious practises. H1B Visa system was completely abused by Satyam using political connections in US and India. All the glitzy office complexes in Secunderabad are just empty coffins of greed. I hope Satyam's downfall will expose more skeletons with India's outsourcing madness.

Jan 07 04:49 PM

[E Nuff Sed:]

Well the Satyam ("truth" in Sanskrit) has emerged from this pile of dung.

Warren Buffet saying that "when the tide goes out, you see who is swimming naked" is so true - and so is the cockroach theory of investing. When you see one or two roaches come out of the woodwork - sell and run for the hills - there something rotten behind those shining walls.

We have seen this again and again with Madoff, AIG, Citi, Enron, Worldcom to name a few.

Unfortunately I learnt this lesson the hard way with AIG and Worldcom. Never again!

Jan 07 08:07 PM

[Andy B.:]

www.mcafee.cc/Bin/sb.h...

Profile of a sociopath describes both Raju and Madoff.

Manipulative and Conning

They never recognize the rights of others and see their self-serving behaviors as permissible. They appear to be charming, yet are covertly hostile and domineering, seeing their victim as merely an instrument to be used. Pathological lying, lack of remorse, shame or guilt, callousness/lack of empathy...

These are Wallstreet sociopaths and our government is filled with these type of people (Barney Frank, Harry Reid, Nancy Pelosi, etc.

I think the one big mistake Madoff made was to take money from the Russians who probably had ties to the Russian mob. The Russian mob and big business in Russia are intertwined (Kind of like our own government) and you don't steal from them and live.

Why else does he have armed bodyguards everywhere he goes? His sons who worked with him (who had no knowledge of what their father was doing (wink-wink) will probably be found dead in an alley sometime in the future and Madoff will probably be shanked in prison.

But, then again, maybe Madoff was working for the mob and his other rich friends who "lost" billions, laundering money for them through his investment firm and conveniently "losing it" in the market, knowing that the US government would pay out for the losses while the SEC officials were all paid off to look the other way. Now that would be a scheme. Then the money would be secretly funneled back to all his friends. 10 bucks says Madoff will disappear before trial, flee the country and disappear, rumored to be living somewhere in Russia.

Only a fool would believe that all these rich billionaires gave billions of dollars to Madoff without checking out his background. We'll probably eventuall find out that half of them were in on the scheme.

Jan 08 12:57 AM

[bagnap:]

E Nuff.

The only problem with the cockroach analogy is that the cockroach is not a leading indicator.

Usually, by the time the cockroaches/naked men/rats leave the sinking ship....

...its too late. The ship has sunk. The markets crashed. The tides out.

I don't think there is any real way to trade this news as it always lags the market.


On Jan 07 08:07 PM E Nuff Sed wrote:

> Well the Satyam ("truth" in Sanskrit) has emerged from this pile
> of dung.
>
> Warren Buffet saying that "when the tide goes out, you see who is
> swimming naked" is so true - and so is the cockroach theory of investing.
> When you see one or two roaches come out of the woodwork - sell and
> run for the hills - there something rotten behind those shining walls.
>
>
> We have seen this again and again with Madoff, AIG, Citi, Enron,
> Worldcom to name a few.
>
> Unfortunately I learnt this lesson the hard way with AIG and Worldcom.
> Never again!

Jan 08 01:02 AM

[Moon Kil Woong:]

The only ponzi schemes you see are the exposed ones. Be vary wary. I suppose it's hard to be paranoid and then trade the market up a lot. That is the point. Until there is better investor protections, regulation, and transparency why should we trust the market participants too much, especially the financials.

Before the government goes writing checks to companies again, I hope this time they take the time to determine which are legitimate and which ones are houses build on cards full of deception, lies, and subversion of securities and insurance laws (hiding between regulatory bodies and/or using off balance sheet machinations to hide losses). Only then can the market really begin its long slow painful road to some semblance of recovery.

Since nothing has yet to be done besides government giveaways, I'd say the game hasn't even begun yet.

Jan 08 01:13 AM

[tiwari:]

By going through the present situation in Indian IT Co. SATYAM, it is clear evident that all the HR & Fin departments at the SATYAM are useless workers. They are mere worried about their earning and not the reputation matter.

We don't know what the SATYAM FOUNDATION a Corporate Social Responsibility setup for the cause is how much transperent in their operations. Their BOOK-KEEPING is also required to be verified by the CBI.

Jan 08 06:58 AM

[williambanzai7:]

This is what they call a Papadam Scheme.

Jan 08 01:26 PM

[gjg49:]

Satyam was NOT a Ponzi scheme. You people need to differentiate the various types of fraud. Raju somehow "faked" over $1.1 billion of cash on his books. Look up the most recent 20-F on sec.gov. He must have had the CFO in on the fraud. Furthermore, how did he "trick" PriceWaterhouse into agreeing that SAY had $1.1 billion in cash and bank deposits? Were the PWC locals in on the fraud as well. Ominously, were certain Indian authorities in on it as well?? This is not a run-of-the-mill fraud ala Madoff (Ponzi), or Enron (off balance sheet chicanery). Nothing is as certain as cash on a financial statement, but the cash at Satyam turned out to be fictional.

Jan 08 04:33 PM